Croatia – Based on 3Q’s strong GDP growth (2.9% yoy, 1.7% qoq) supported by strong domestic demand (3.4% yoy in personal consumption, 2.1% yoy in government consumption, 2.9% in investments) and exports (6.3% yoy, out of which services exports grew by 7.4% yoy), we upgraded 2016 our growth estimate to 2.6% (previously 2.3%). Based on better-than-expected 2016 GDP performance and the expectation that the EU will keep growing in 2017 at a similar rate than in 2016, but above all based on maintained domestic consumption growth and looser fiscal policy in the runup to spring local elections, we upgraded our 2017 growth forecast to 2.9% yoy. We expect that a hike in net wages amid a lower personal income tax burden, combined with the hike in public sector wages and improved labour market conditions, will positively affect household spending, while investment activity is expected to benefit from c.30% higher EU funds inflows. We found that risks to our baseline scenario are at the moment broadly balanced, although higher-than-expected rises in oil prices could undermine disposable income and consumption growth.

Croatia – Positive developments in the real economy continued in 3Q, as real retail trade in July and August grew by 4.4% and 5.1% yoy, respectively, supported by improved labour market conditions and a strong tourist season.

Croatia – The stronger-than-expected q1 outturn (+2.7% y/y GDP growth) and continued positive trends in high frequency data (industrial production up 5.0% and real retail trade up 3.2% y/y in April), alongside the forthcoming tourist season and improved labour market conditions, have strengthened our view that the economy will perform at a solid +1.8% y/y growth rate in 2016.